Identifying "The Recovery"

February housing numbers for the Boston area as promulgated by the S&P/Case Shiller Index show a year over year decline of 1% and a 1.5% decline from January to February. What stock should we put in these numbers when gauging the health of the real estate market and a potential recovery? In short, virtually none.  

The year over year difference is slight and remains 2.3% higher than the bottom reached in April of 2009. Moreover, both year over year and month over month numbers, if they could somehow be adjusted for the severe weather we experienced in February, would likely show an improvement in both categories. Also, keep in mind that these numbers look backward and we are concerned with the future.

In predicting the future of the real estate market, I am most intrigued by the historically high number of homes being bought for cash; particularly considering that at the height of the market, the vast majority of buyers had no (or virtually no) skin in the game. I am seeing percentages of cash buyers ranging from 25%-40%, depending on the method of calculation and geographic location. What this means depends largely on who is buying these homes. Based on my personal experience and all that I have heard and read, it is largely investors. More specifically, investors who are buying distressed and bank-owned homes in order to "flip" them. The speed of a recovery depends largely on the success of these investors. (Obviously, job creation, inflation and consumer sentiment factor into any housing recovery as well.) If these investors see a high enough return and a healthy pool of buyers, they will continue the process and the recovery will be self-sustaining, irrespective of additional government stimulus. If a market for these rehabilitated homes does not materialize, I see the real estate market remaining stagnant for quite some time. The good news is that the amount of money coming in from the sidelines and investors' willingness to risk the same is a very positive sign.

 In addition, keep in mind that whatever happens, the market will need to absorb the shadow inventory (see prior entries for definition). Here again, investors flipping property is a crucial component.

As always, I welcome your thoughts.